GBP/USD: headed for a challenge of the 1.3173 July 30 high

  • GBP firmer: Overall positive tone from the MPC current assessment, coupled with further Brexit positive headlines post the MPC release, saw GBP rebound in line with EUR and risk in general.
  • US CPI, although a miss, still cements the foundations for two further rate hikes room the Fed which limits the downside in the dollar.

GBP/USD is currently trading at 1.3107 from a high of 1.3124, (just shy of the 1.3129 August 2nd high) and up from a pre-BoE and US CPI low of 1.3025. Cable has been benefitting from the positive Brexit headlines of late, although Brexit uncertainties remain a critical risk to the BoE's projections and counter the clear positives seen in the erosion of economic slack and positive employment and improving wage data, as analysts at Westpac Banking Corporation explained, noting that the Bank rate held at 0.75%, stock of Govt. bonds (GBP435bn) and Corporate bonds (GBP10bn) to be maintained. 

BoE takeaway:

  • Effective current conditions good and would merit more withdrawal of accommodative policy.
  • Effective expectations are faltering (due to Brexit uncertainties) so dictate caution and gradual path.
  • The overall tone of the MPC’s statement and minutes is relatively positive and the economy is seen to be progressing as projected in the August Inflation Report. 
  • The MPC do note that recent surveys and their own Agents’ Report show faltering in investment and employment intentions and that the export outlook is declining.

Sterling rose through the 1.3087 5wk high made on Tuesday after pound shorts were squeezed on the Brexit deal optimsm and also threatened that level, (1.3087) on Wednesday as USD fell on the US/China trade talk hopes. This is likely a line in the sand from here in an environment of dollar weakness, underpinned by today's CPI data for August which missed sharply to the downside at 0.2% m/m and 0.1% m/m for the headline and core, leaving headline inflation at 2.7% and core inflation at 2.2%. 

Two more rate hikes from the Fed this year post CPI

Analysts at TD Securities explained that this weakness appeared to be a core goods story, reflecting steep declines in apparel and recreation goods: "Details were more upbeat than the headline misses suggest, with core services solid on strength in OER and rents. This report will not stir the hawks but is still consistent with gradual rate hikes back toward neutral. Our bias remains for two more rate hikes this year and three in 2019."

GBP/USD levels

Analysts at Commerzbank explained that they look for a challenge of the 1.3173 July 30 high and the 1.3363 9 th July high: "A move above the 1.3363 July high would imply a deeper corrective phase to the 1.3473/1.3527 June high and 200 day moving average."

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